Frances Kennedy: "Prime Minister Prodi could call new elections"

President Oscar Luigi Scalfaro accepted his resignation at the presidential palace, but asked Mr Prodi to continue in office in a caretaker capacity.

Deputies in the lower house voted by just one vote (313 to 312) against the prime minister, signalling the end of Italy's second-longest lasting government since World War II.

The debate was called after the Communist Refoundation Party withdrew its backing from the government because of disagreements over next year's budget.

Mr Prodi's two-and-a-half-year-old coalition depended on the party for a majority in the lower house of the Italian Parliament.

Communist Tana de Suletta is disappointed in the result

In a debate in the lower house on Thursday, he made a number of concessions to the communists, including a promise to speed up the introduction of a 35-hour working week.

He also said Italy would not take part in air strikes against Yugoslavia without the approval of the United Nations Security Council.

But despite his concessions, too many Communist Deputies voted against him.

Italian stocks and shares fell several points on the Milan stock exchange immediately after the results became known.

Our Rome Correspondent, David Willey, says that Mr Prodi will probably now attempt to put together a new coalition without Communist support.